PNC Financial Services Group (PNC) is the fifth-largest regional bank in the United States (by total branches), sixth largest by total assets and sixth largest by deposits in the United States. Recovering from a shaky performance in CY2012, PNC is all set to improve its performance in CY2013. It has been noted that PNC along with two other banks is expecting its industrial and commercial loan portfolio to grow in 2013. This particular change has been forecast amid the rising competition from other lenders. This is an interesting fact because, both industrial and commercial lending, are valued to lending institutions in comparison to other types of lending.
PNC's Relative Growth - S&P 500
PNC's price performance has been reflective of its financial performance in the 1Q13.
Source: Y Charts
In the five months starting from the beginning of the year, PNC's stocks are up by 20.64% whereas the benchmark S&P 500 rose just 12.17%.
PNC's Relative Growth - Industry Leaders
PNC's performance in comparison to its main competitors has been relatively better.
Source: Yahoo finance
The above graph shows that U.S. Bancorp (USB) had the least rise in value over a time period of five months. The rise in value was almost 7%. BB&T Corp (BBT) and Wells Fargo & Co. (WFC) had a rise in value of 10% and 16% respectively. PNC's price rise was above the rest, clocking at an impressive 21%.
Barron's cited that the increase in commercial and industrial loans could be the result of increased fracking activity in the Oil and Gas sector, an increasing farm income and manufacturing revival, which is centered at the bank's Midwest turf. Barron's was also keen to acknowledge another source of income in the form of fee business.
Source: PNC's Financial Statements
It is evident from the above table that PNC extracts its major revenues from retail banking, corporate and institutional banking and others (which includes BlackRock). With an expected increase in the commercial and industrial loans, the corporate and institutional banking segment is looking for an increase in its revenues. As far as the Others segment is concerned, its revenues increased due to the impact of fourth-quarter 2012 non cash charges related to the redemption of trust preferred securities and integration costs.
According to its financials, the performance of PNC has been substantially improving. As noted above, PNC's CY 2013 performance is forecast to be much better than the previous year. Therefore, analysts at Barron's are expecting the share price of PNC to rise as much as 20% in the year 2013.
Source: PNC financial statements
As shown in the table above, the total revenue change on a quarter-over-quarter (QoQ) basis has been negative 3% but the net income, diluted EPS and ROE are all rising by more than 40% each. On a year-over-year (YoY) basis, the total revenue has increased by 6%, the net income and diluted EPS by more than 20% each and the ROE by a good 13%. This shows that not only the 1Q13 performance has been better by all standards as compared to the previous year but quarterly change in the net income, diluted EPS and ROE are showing impressive financial performance by PNC.
The reason why the QoQ analysis is showing impressive figures despite the fall in the total revenue is explained in the table below:
Source: PNC financial statements
As it is evident from the above table, PNC has reduced its losses on a QoQ basis by $434 Million or 15%. This is because some expenses, which were charged in the 4Q12 did not recur in the 1Q13. A statement released by the rating agency, Fitch, outlines this very fact that expenses for PNC fell considerably on a sequential basis. The bottom line results for PNC were also aided by the decline in the provision expenses.
In order to understand PNC's position in relation to the industry leaders, we can perform the comparative analysis to get an insight into the situation.
Information Source: Morningstar
As the above graph depicts, PNC's P/E ratio is less than the industry and at par with the average with its main competitors. This suggests that the stock is possibly undervalued and can see a rise in its price in the future. The P/B ratio of PNC is lower than that of the industry as well as the average calculated with the main competitors again signifying the possible undervaluation of this stock. The dividend yield of PNC in comparison to the industry is higher and it is at par with the average calculated with the main competitors. All of these statistics are in favor of PNC suggesting an imminent upswing in its price.
The 2008 financial meltdown was a test for all financial services companies. With an overall downward swing, the meltdown knocked many companies off their footings. An analysis of the company's performance during this time portrays how well it is capable of rescuing itself from unforeseen risks.
Source: Yahoo Finance
The blue line shows the performance of PNC stock in comparison to the benchmark S&P 500, which is shown by the red line. It can be seen that PNC's stock, on average, stayed with market movements of that time showing that a future financial meltdown will affect the company adversely. Reuters further noted that the loan growth will be harder to achieve as companies are concerned about the issue of debt ceiling.
With an increase in demand for loans from the industrial and commercial sectors of the economy, PNC, along with other banks, is all set to cash in this latest opportunity. PNC has also improved its financial performance in the latest quarter by reducing its expenses drastically. The comparative analysis is also showing the undervaluation of the stock and forecasting a possible upswing. However, due to risks involved, I would not advise the investors to invest in this stock for a longer horizon as it will be hard for PNC to continue its impressive performance in the quarters to come. To sum up, I recommend a buy stance to investors over a shorter horizon.